4 Tips for Properly Investing Your 401(k)
A s volatile as financial markets have been, you may be finding it challenging to make sense of them lately. When your money is in a tax-sheltered 401(k) or similar company-sponsored retirement plan, things may seem even murkier. Here are 4 practical tips to guide the way.
Seek simplicity. There’s nearly 70 years of academic evidence suggesting you don’t have to be a financial wizard to expect to earn decent market returns over the decades of your career. Favor low-cost, “passive” funds that don’t try to cleverly pick individual winners/losers or time their trades based on the market’s moods. That usually means index funds that simply buy and hold large swaths of the global stock markets. Smooth out the ride by including a fixed income fund to offer lower, but less volatile expected returns. Patiently hold the mix that’s right for you through all the ups and downs.
Consider the parts and the whole. If there are no passive stock index funds available in your 401(k), consider using the account for your fixed income allocation, and concentrating your stock market holdings in your personal accounts where you have more control. Fixed income funds are usually best held in a tax-sheltered account anyway, and even a less-than-ideal fund is usually still “good enough.”
Avoid (or at least minimize) company stock. For your career, a single place of employment can serve you well. When it comes to your life’s savings, broad, global diversification is your best friend.
If target date funds (TDFs) are a choice … TDFs are appealing for their simple efficiency, but they aren’t perfect. They tend to lock you into a prescribed timeline for when you’ll start holding fewer stocks and more fixed income. This reduces your risk exposure but also lowers your expected returns. I prefer model portfolios that let you control that timeline according to your personal circumstances. That said, saving for retirement in a TDF is still far better than not saving at all.
Written by John A. Frisch, CPA/PFS, CFP®, AIF®, PPC®